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Cotendo Goes to Akamai - Analyst Blog

Confirming earlier rumors,
Akamai Technologies Inc.
(
AKAM">AKAM
) recently announced that it is buying competitorCotendo for $268.0
million in cash. The deal is expected to close in the first half of
2012. Shares jumped 18.6% to close at $31.63 following the
news.

Cotendo specializes in software and services that improve the
delivery of content across the Web and on mobile-device networks.
In less than three years of its launch,Cotendo has been successful
in acquiring a large clientele (approximately 300 customers)
including some big tech companies, such as Facebook,
Zynga Inc.
(
ZNGA">ZNGA
),MyYearBook ,HTC ,
Microsoft Corp.
(
MSFT">MSFT
) and
Google Inc.
(
GOOG">GOOG
).

Over the last 12 months,Cotendo emerged as the most notable
competitor ofAkamai in the higher margin value-added services (VAS)
market, after it won some major deals.Cotendo also sells its VAS at
a comparatively lower price, which started putting tremendous
pressure onAkamai's higher-margin revenue growth and customer base.
In the third quarter ended September 30, VAS contributed 58.0%
ofAkamai's total revenue.

To counter the growing threat fromCotendo ,Akamai sued the
company for violating its patents in November 2010. However, this
had been a regular practice withAkamai , and notably, this is the
third instance when it has acquired a company earlier sued for
patent violation. The other two companies were Digital Island
andSpeedera .

Although the current purchase price is slightly below the
rumored figure of $300.0 million to $350.0 million,Akamai is paying
approximately 6 times of the estimated revenue for next year, which
reflects the growing value ofCotendo , in our view. Besides
lowering competition from the VAS sector, the acquisition is
expected to strengthenAkamai's dominant position in the dynamic
site application (DSA ) market.

However, we believe that the major growth driver
remainsCotendo's mobile content acceleration products and services.
We note that to-dateAkamai does not have a proper product portfolio
for the mobile cloud and is yet to launch a product for
acceleration of mobile content delivery. The joint solution with
Ericsson, called mobile cloud accelerator is expected to be
available only in some markets by the middle of next year.

On the other hand,Cotendo launched its mobile acceleration
product some time in 2011 and analysts believe that the ready
availability ofCotendo's product will expandAkamai's mobile
solutions portfolio going forward.

We also believe that the acquisition will provide significant
competitive edge toAkamai compared to other established content
delivery network providers (CDN ) such as
Limelight Networks Inc.
(
LLNW">LLNW
), and
Level 3 Communications Inc.
(
LVLT">LVLT
), as well as new entrantsCDNetworks ,
AT&T Inc.
(
T
) and
Verizon Communications Inc.
(
VZ">VZ
) over the long term.

We maintain our Neutral recommendation onAkamai over the long
term (6-12 months). Currently,Akamai has aZacks #3 Rank, which
implies a Hold rating on a short-term basis.

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